Wall Street's 'fear' gauge shows no fear

Investors are all smiles these days as reflected by a Wall Street “fear” gauge that hit a seven-year low Friday.

Scared of stocks? No way. In either a sign of complacency or a signal that stock investors are calm, cool and collected about the stock market’s near-term future, a closely followed Wall Street “fear” gauge is showing no fear.

The measure of investor angst, the CBOE Volatility Index, better known as the VIX, hit a seven-year low on Friday. What it means: The fear level on Wall Street is at a pre-financial crisis low.

The VIX fell 5.9% for the week that ended Friday, closing at 10.73, its lowest point since Feb. 23, 2007, when it sank to 10.58. The much-watched volatility index is now within 2 points of an all-time low.

A low VIX reading could mean investors are too complacent, potentially setting themselves up for sizable losses and big disappointment, similar to what happened in 2007-08 when investors didn’t see the mortgage crisis coming.

Or it could be a bullish sign that suggests there is little that can derail the stock market’s current momentum.

Kate Warne, market strategist at Edward Jones, says the low anxiety level suggests investors see little on the horizon that could prompt a huge pullback in the stock market. And while she doesn’t see a 2008-style rout, she says investors should be prepared for a 10% correction at some point.

Compare that to the fear gauge’s peak “fear” reading during the height of the financial crisis in October 2008. Back then it skyrocketed above 80 amid fears that the financial system would suffer a meltdown and the stock market would crash.

The VIX basically measures how much stock investors are willing to pay to insure their portfolios against losses in the benchmark Standard & Poor’s 500 stock index.

The S&P 500, of course, notched its 18th record close of the year Friday, closing up about 0.5% at 1949.44. It is up 5.5% on the year, after racing ahead 30% last year.

Similarly, the Dow Jones Industrial Average last week rose 207.11 points, or 1.2%, to 16,924.28, also a record high.

The gains have come as a spate of market fears have dissipated. The crisis in the Ukraine, for example has cooled. And the U.S. Federal Reserve keeps insisting that short-term rates aren’t going up anytime soon.

Markets got more good news this week when the European Central Bank took additional steps to jump-start the eurozone economy. The U.S. government also reported Friday that the economy produced a better-than-expected 217,000 jobs in May, a sign that the recovery remains on track after a brutal winter.

“Markets started off the first full week of June continuing their slow churn north,” says Todd Salamone of Schaeffer’s Investment Research. “However, a round of fresh stimulus measures overseas on Thursday and an upbeat payrolls number on Friday sparked a fresh wave of buying power on the Street.”